RBS creates 'bad bank' ahead of private-sector return

State-rescued Royal Bank of Scotland announced on Friday plans to create an internal 'bad bank' to run down £38 billion of high-risk assets and accelerate its return to the private sector.

RBS hopes to remove all of the toxic assets, equivalent to $61 billion or 45 billion euros, from its balance sheet over the next three years, the bank said in a statement as it announced also a third-quarter net loss of £828 million.

The lender, 81-percent-owned by the British government after the world's biggest banking bailout in the wake of the 2008 financial crisis, said it had decided against creating an external 'bad bank' owing to the risk and expense involved.

RBS, whose shares were among the biggest fallers in early trading on Friday, said that it would also speed up the sale of Citizens, its US banking subsidiary.

"RBS announces management actions to accelerate the building of its capital strength and to enhance its strategic focus on its core UK businesses," the bank's statement said.

"The measures will include the creation of an internal 'bad bank' to manage the run-down of high risk assets projected to be £38 billion by the end of 2013."

RBS chief executive Ross McEwan added: "Our goal is to remove between 55 percent and 70 percent of these assets over the next two years.

"While there is inevitable uncertainty associated with running down such assets, we have a clear aspiration to remove all these assets from the balance sheet in three years," he said.

RBS had in August promoted New Zealander McEwan to the post of chief executive. The former head of retail at the bank has replaced Stephen Hester, who surprised markets in June by announcing that he would leave the bank before the end of 2013.

Hester's departure, reportedly at the request of Britain's coalition government led by Prime Minister David Cameron, has sparked questions about the strategy for the state-rescued bank.

Analysts believe that British finance minister George Osborne wanted a new face to help guide Royal Bank of Scotland's return to private ownership.

Osborne said in a statement on Friday: "Today RBS sets out a new direction... that will lead it to being a boost to the British economy instead of a burden."

He added: "Under this new direction RBS will deal decisively with the problems of the past by separating out the good from the bad, and putting the bad loans in a bad bank. Our independent analysis shows that the bad bank should be an internal one, funded by RBS, rather than an external one funded by the taxpayer."

Joe Rundle, head of trading at ETX Capital, said an internal 'bad bank' still posed a risk to the overall health of the lender.

"It seems as if RBS and the UK government have not been able to completely quantify the toxic assets on the balance sheet which is perhaps why the bad bank wasn't spun off separately," he said

"Today's move looks to be a clever PR (public relations) strategy so RBS can distinguish the performance of the good bank from the bad bank. This will help restore confidence... and also help pave the way for privatisation," Rundle added.

Lloyds Banking Group, which is 33 percent owned by the British taxpayer after a separate state bailout, kick-started its return to the private sector in September, when the government recouped £3.2 billion from selling six percent of its stake.

RBS meanwhile announced earlier in the week that it was reviewing its foreign exchange trading practices after being drawn into a worldwide probe along with other major banks into the possible manipulation of forex deals.